EARNINGS PREVIEW: Online brokers face market headwinds

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Published: Oct 9, 2008 9:00 a.m. ET

Last Updated: Oct 9, 2008 9:04 a.m. ET

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By Brett Philbin Of DOW JONES NEWSWIRES

TAKING THE PULSE: Despite continued high retail trading levels, results from two of the three major online brokers will be affected by declining equity markets and the companies' exposure to battered financials.

While some analysts project a 25% increase in September daily average revenue trades, a plunging stock market could mean fewer net new assets for Charles Schwab Corp.
SCHW, -0.68%
and TD Ameritrade Holding Corp.
AMTD, -0.32%
Schwab and Ameritrade are also facing charges related to debt holdings and client reimbursements, respectively.

E*Trade Financial Corp.'s
ETFC, +0.23%
results will be weighed down by more provisions for loan losses in its banking unit as well as losses in its GSE preferred stock exposure.

Investors will be watching Schwab's asset figures closely as the broker is less dependent on trading than its peers. Schwab's YieldPlus fund also remains an unresolved issue. The fund was hurt by betting heavily on mortgage-backed securities. Company watchers will look for clarity on any potential earnings impact from legal fees.

Wall Street Expectations: Unlike its industry peers, TD Ameritrade will report earnings results for its fiscal fourth quarter. Analysts are looking for earnings of 31 cents a share on revenue of $606 million, compared with year-ago earnings of 33 cents a share on revenue of $575 million.

Key Issues: TD Ameritrade said it will pay up to $50 million to reimburse clients for losses from holdings in Reserve Primary Fund, a money-market fund that experienced losses. As with Schwab, analysts cut estimates on Ameritrade to reflect the charge.

Ameritrade's growth in asset-gathering, where the company is shifting its business model, will once again be a point of interest to investors. In addition, comments from new Chief Executive Fred Tomczyk on the health of the retail investor as well as the impact on the broker of further U.S. Federal Reserve interest rate cuts will be closely monitored.

Wall Street Expectations: E*Trade is seen reporting a loss of 27 cents a share on revenue of $150 million. A year ago, E*Trade posted a loss of 14 cents a share on revenue of $321 million.

Key Issues: In September, E*Trade said it expects three-year cumulative losses on its home-equity portfolio to be "somewhat above" its previous forecast. The broker continues to work through risk on its balance sheet from its bank's portfolio of mortgage-backed securities, which plummeted in value as foreclosures and delinquencies surged. Investors will be awaiting news on the portfolio, as credit concerns continue to weigh on the stock.

E*Trade also faces losses related to preferred stock holdings in Fannie Mae
FNM, +7.06%
and Freddie Mac
FRE, +2.86%
E*Trade sold all of its remaining holdings in both securities.

(The Thomson Reuters estimate and year-ago net may not be comparable due to one time items and other adjustments.)

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